Tackling the Red Tape Delusion

The severe recession precipitated by the banking crisis of 2008 means the economy is likely to dominate policy debate in this election to a much greater extent than for any election since 1992, or even further back. But how will the economic crisis affect people’s views on the way the economy should move forward?

For thirty years, the mainstream economic orthodoxy was that the way to economic success lies in deregulating product, labour and financial markets as much as possible. Given that the banking crisis was an object lesson in how deregulation could, in some circumstances, deliver not economic success, but instead near-armageddon, we might have thought that this would lead to some reconsideration of whether deregulation was always and everywhere the best policy after all.

However, the proponents of deregulation – including the Conservative party (but also some leading politicians in the Liberal Democrats and Labour parties), business groups such as the Institute of Directors, Confederation of British Industry and British Chambers of Commerce, and right-wing think thanks such as the Institute of Economic Affairs have instead insisted that the economic crisis means we need to deregulate still further, particularly in the labour market.

The message is that red tape and regulation are strangling business and that we need to restrict workers’ statutory rights, pare back the minimum wage and reduce the power of trade unions in order to have an employment-led recovery.

It is easy to see why the deregulationist view is attractive to the Right. It delivers straightforward policy prescriptions which fit with neo-liberals’ instinctive dislike of regulations and organised labour institutions. But the fundamental problem for proponents of this view is almost none of its assumptions are borne out by the evidence.

The latest ToUChstone pamphlet, The Red Tape Delusion: Why deregulation won’t solve the jobs crisisby Stewart Lansley and myself, examines in detail whether there is a relationship between the degree of regulation in the labour market and various aspects of the economy’s performance – the unemployment rate, productivity growth, and so on. We survey a vast array of evidence on cross-country economic performance as well as empirical studies of the effect of particular regulatory (or deregulatory) measures in the UK and other industrialised countries – for example the employment effect of minimum wages, the relationship between trade union density and productivity growth, the impact of employment protection legislation on employment, and so on.

The overall findings are that there is no evidence whatsoever that moderate levels of labour market regulation impede economic performance, and a good deal of evidence that some types of regulation can improve aspects of economic performance. For example:

There is no evidence that a minimum wage set at the current UK level impedes employment creation or increases unemployment.

The modest re-regulation of the British labour market in the last decade has been achieved without detriment to employment creation. Indeed, the impact of the 2008-09 recession on UK unemployment – which has risen by much less than in the early 1980s and 1990s recessions – suggests that the slightly more regulated labour market of the last decade has been working well.

Trade unions have no significant negative consequences for labour market outcomes, and have positive effects in promoting workplace cohesion and social justice.

Active labour market policies, if well designed, can make a substantial difference to the employment prospects of the long-term unemployed.

Generous unemployment benefits of limited duration (with ongoing social assistance provided for those in need) combined with job search requirements are effective in reducing long term unemployment.

Given that the UK is already a very lightly regulated economy (of the leading industrialised economies, only the United States is less regulated), there is nothing to be gained in terms of improved economic performance from deregulating further. On the contrary, it is quite possible that reducing or scrapping regulations could actually make the UK labour market perform worse ­ reducing the rate of productivity growth, for example.

At a time when an increasing number of commentators are reviving the mantra of deregulation in the hope of capitalising on the public’s fears of higher unemployment in the wake of the recession, this new ToUChstone publication provides a welcome blast of evidence-based reality and shows that deregulating the labour market won’t deliver improved economic performance.

GUEST POST: Howard Reed is the author (with Stewart Lansley) of “The Red Tape Delusion“. He is Director of the economic research consultancy Landman Economics, which specialises in complex econometric modelling work and policy analysis. He is also a research associate for both ippr and Demos. Previously, Howard has worked at the Institute for Fiscal Studies (where he was responsible for the TAXBEN microsimulation model) and IPPR (where he led a project on the impact of immigration on wages and employment in the UK). His recent projects include a publication for Compass, “In Place of Cuts”, which argued for a package of progressive tax increases as an alternative to large scale public spending cuts in the next parliament.